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To: Geoff Nunn who wrote (49971)	7/7/1998 1:29:00 PM
From: rudedog	Read Replies (1) \| Respond to of 176387

geoff - very insightful post. I agree with your statements as applied to the commercial PC business. This is the original CPQ business, known inside the company as 'classic Compaq'. Expecting the management of that business to correct their various business practices is like asking the fox to guard the henhouse IMO. Consumers has not had any of these problems. Their model (perfected by Mike Heil, who was brought in from outside to run the consumer group when it was founded, I think he came from Sony) drives their production in a very efficient way by setting product windows, and producing to a demand forecast for that window. So far this group has never missed a forecast and their success is one of the few bright spots in the CPQ business picture. In a nutshell the problem is how do you coordinate sales and production so that: (1) assembly plants operate fully utilized and efficiently, and (2) inventory levels of product and components are held at minimal and sufficient levels. CPQ senior management has tried a number of halfway measures to address the issue, none of which has been effective since the executives in charge have a long history of relationships with the channel. In particular, keeping the plants running smoothly had a higher priority than driving sales out, since the channel could always smooth out the load, which resulted in the infamous 'stuffing' strategy. This obviously blew up in a spectacular way in late 1997. EP finally bit the bullet and sacked almost everyone involved, from the SVP WW Sales on down. Replacement of that management has been slow but I think that the choices are good ones. Mike Heil was moved from Consumers to the SVP WW Sales slot. The head of North America was just named in June - he is Peter Blackmore, formerly head of the European enterprise sales unit. Peter has been very successful in Europe and does not have any ties to the 'old guard' in Houston. Also in June, Enrico Pesatori was named to head corporate marketing. When at Digital, Enrico almost single-handedly turned DEC's PC business around, but apparently Bob Palmer couldn't stand that much success and Enrico left DEC in 1996 to go to Tandem as COO. Tandem was at that time in it's 13th losing quarter. Enrico put Tandem in the black in 90 days and Tandem has not lost money since. We have yet to see if this team can get to the bottom of the mess in commercial desktops, but they are a pretty tough and successful management team. As to your other points, I think you are right about controlled pricing and price protection in the commercial channel - I think the dynamics in the consumer sector are different, and based on CPQ's success in that sector I doubt if there is much reason to change the consumer business model at the moment. CPQ's move to cut price protection from nearly six months to a few weeks in the commercial market supports your analysis on that point pretty well. I will be very interested to see if the new management team can change the way 'classic Compaq' does business. Some people are saying that by year end there will not be much left of 'classic Compaq' either in people or business practices.

To: Geoff Nunn who wrote (49971)	7/7/1998 7:43:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 176387

Geoff, Congratulations! That's one fantastic analysis. I agree with everything that you said. But let me add one further point of inefficiency: the BTO model requires resellers to do the assembly. That requires them to either inventory components or wait for a shipment from Compaq. Inefficiency in the extreme! Why didn't Compaq simply drop ship orders to the customer instead. That way the reseller never has to take physical possession of the merchandise and inventory is kept down. Your quip about Soviet centralized planning may be a helluva lot closer to the truth than anything else anyone has said about Compaq. It does not seem to be a market-driven company at least in terms of assembly and distribution, and I think that is the genesis of the problem. TTFN, CTC